MARTIN WOLF: A Greek Exit From The Euro Would Be 'A Nightmare'

Everyone is wondering what would happen if Greece left the euro,
and while politicians keep arguing that the effects would be
limited, some analysts are beginning to speak up otherwise.

Martin Wolf, chief economics editor of the Financial Times and
one of the most influential financial journalists in the world,
wrote yesterday in that publication that a
Greek exit from the euro would be nothing less than "a
nightmare," provoking "chaos" within Greece and disastrous
consequences elsewhere in the euro region.

He argues:

If Greece leaves, the eurozone will have to change
fundamentally to make survival less painful and therefore more
credible. If that is impossible, as many suppose, irrevocably
must be seen as a mirage, which would in turn guarantee the
repetition of large crises. It also destroys the economic
arguments for the currency union by undermining financial
integration and rendering long-term investments dependent on
access to the entire eurozone economy far riskier. It is a
nightmare.

Without a strong response, he argues:

Inflation would soar in the periphery; in core nations,
deflation would set in. Inflation should erode peripheral
nations’ debt mountains, provided they were promptly
redenominated in the new domestic currencies. The value of the
foreign assets of core countries would fall, their new currencies
would soar relative to erstwhile partners and their economies
shrink. It would be painful for all.

His column suggests that investors calling for Greece to get it
over with already are seriously misjudging the ramifications of a
Grexit on not only the euro area, but on the global economy.
That's because the eurozone taken as a whole is effectively the
second-largest economy in the world, and a Greek exit
dramatically increases the potential for a full euro-area
deterioration.

A Greek exit would greatly increase the likelihood of
such an outcome, both now and for the indefinite future, by
showing that the euro is not forever. Every­body would then have
to take into account at all times the possibility of break-up. If
there were believed to be a serious risk of this, interest rates
could explode across the board in weak countries...

The risk that a bigger eurozone upheaval would cause a global
crisis is real. As frightening is the likelihood that eurozone
crises would become permanent features of the world economy.